The Man in the Mirror: Improving Your Credit Score

Applying for a loan can seem scary. For entrepreneurs looking to start a new business, it is often the one dreaded milestone in an expanse of eager planning and action. As with anything, knowing what to expect and being prepared is the best way to approach this. But do you know what to expect? Sure, you will need to provide a comprehensive business plan, but at what other indicators will your potential banker be looking? Many people are so consumed with planning for their business venture that they forget that their personal credit score will be a factor in their evaluation.

Credit scores are important for everyone, whether you’re an entrepreneur starting a business or a young adult buying a car or a house. Every time you make a substantial financial transaction, such as applying for a credit card, personal loan, or even insurance, someone is checking your credit. It is a direct reflection of you as a consumer. It shows how you pay your bills, how much debt you have, and if you have ever filed for bankruptcy. Your credit report is used by creditors, insurers, and even employers to evaluate your respective applications. There’s no denying the importance of your credit score. So, since you can’t get around it, here are some tips to improving it:

Monitor Your Report

There are three major credit reporting bureaus: Equifax, Experian, and TransUnion. Many people aren’t aware that, by law, they are required to give you a free report annually through www.AnnualCreditReport.com. You can order all three of these reports from this website at the same time, but a smarter route would be to order only one at a time. By only ordering one, you can actually pull a separate report (one from each agency) every four months and, in turn, better monitor your report for free. Once you have your report, review it to check for errors. Unfortunately, errors are becoming much more common due to the increase of identity theft. But not to worry, you can dispute any errors at these sites:

This might seem like the most obvious tip, but it is also the most important. Making your monthly payments on time is the single best thing you can do to ensure you have a positive credit report and score. One hiccup on even the smallest bill can undo years’ of timely payments. A simple way to avoid missing a payment is to take advantage of your bank’s Bill Pay program and schedule your payments in advance. Additionally, develop a budget and be self-disciplined enough to know your cash flow limitations. It’s most definitely not a bad thing to be conservative with your finances.

Keep Your Credit Card Balances Low

One of the lesser known factors in your credit score is found in the percentage of revolving credit you have available. The smaller the figure, the lower your credit score. One strategy to eliminate your credit card debt that you have accumulated over the years is to focus on eliminating different cards one-at-a-time. Look at the interest rates of each of your cards, and start with the highest rate. Another option would be to look at paying off any credit cards through a home equity loan that will likely have a much lower interest rate.

In with the Old, Out with the New

While the above point clearly advises to pay down your balances, you may benefit from keeping your older accounts with a zero balance and not closing them. Assuming you have been in good standing and paid as agreed, a longer history of good debt will typically improve your credit score. As with most things, a longer, positive track record can be a good reference.

Furthermore, you are better off avoiding opening new accounts that you don’t need and won’t use. Department stores are notorious for offering discounts if you open up a charge account with them. That one-time discount sounds very appealing, but resist the temptation; you will get more out of a good credit score.

Process v. Results

Lastly, an old adage: bad things happen to good people. If you’ve had some negative items on your credit report, address the issues and put a plan in place to recover. Most experienced bankers would caution you to show patience and become process-oriented instead of goal-oriented. Understand and focus on the steps you need to take instead of stressing over the results. Remember that in transactions such as business loans, a real, live person will ultimately make the decision on whether or not to invest in you. We understand that there are occasionally extraneous circumstances (e.g.: medical expenses like cancer treatment) and will consider other factors along with your credit score. The important thing is to work on repairing your credit score now instead of waiting. Over time, you will see improvement.